Prices, and Production: Lecture III, Part I
At this point it is necessary to
introduce a distinction between producers' goods that can be used in
many, if not all, stages of production, and those that can be used in
one, at most a few, stages of production. To the first class belong
almost all original means of production, and implements that are not
specific as to their use, Hayek gives knives, and tongs as examples
for this. To the second belong most specialized machinery, complete
manufacturing establishments, and the types of semi-manufactured
goods that would become finished goods only by passing through a few
more stages of production. Using von Wieser's terminology, the former
are producers' goods of a specific character, or specific goods, and
the latter are producers' goods of a more general applicability, or
nonspecific goods. Though the categorization is not absolute, we
should always be in a position to whether a good is more, or less
specific relatively to other goods.
It is obvious that producers' goods
of the same kind cannot bring in different returns, or obtain
different prices for a long duration of time. On the other hand, it
is similarly obvious that the only method by which to shift
producers' good between stages of production happens to be temporary
differences between prices offered in those varying stages. When such
a difference occurs between the relative attractiveness occurs, the
goods in question will be transferred to the more appealing stage
until, by the law of diminishing returns, the difference is erased.
Neglecting the possibility of changes in technical knowledge, the
apparent cause for a change in the return obtained from a producers'
good of a certain kind used in different stages of production must be
a change in the price of that good in the stage of production in
question. Our question now is: “(W)hat brings about variations of
the relative price of such products.” Though it may seem strange
that the prices of the successive stages of the same product would
fluctuate since they both depend upon the price of the final product,
of the consumer good. But, looking back on the last lecture, the
possibility for a shift in respect to the proportion of consumers'
goods demanded, and producers' goods demand, and the consequent
changes in the structure of production resulting from a change in the
relation between the quantity of original means of production
utilized, and the final output of consumers' goods presents us with
an easy answer to the prior.
Hitherto, Hayek has not mentioned the
price margin that results from these relative fluctuations of the
prices of the products of successive states because he has paid no
attention to interest by treating it as a payment for a definitely
given factor of production, just like wages, or rent. In equilibrium,
the price margins are completely absorbed by interest; hence, Hayek's
assumption concealed that the total amount of money received for the
product of any stage will exceed the amount paid out for any goods,
or services utilized there. Investigating this though, will bring us
too far into the general theory of interest, even for the
book itself; ergo, we must be content with Hayek's insistence
that: “other things remaining the same- these margins must grow
smaller as the roundabout processes of production increase in length,
and vice versa.”
Nevertheless, the fact that in equilibrium the price margins, and
amount paid in interest coincide does not allow us to take for
granted that the same holds in a transitory period; in fact, the
relation between these two magnitudes will consist one of the main
objects of our further inquiry.
The interrelation
between the two suggests two possible methods to solving our problem,
for which I will quote Hayek at length:
either we may start from the changes in the relative magnitude of the
demand for consumers' goods and the demand for producers' goods, and
examine the effects on the prices of individual goods and the rate of
interest; or we may start from the changes in the rate of interest as
an immediate effect of the change in the price system which are
necessary to establish a new equilibrium between price margins and
the rate of interest.
Since the first
follows naturally from the first lecture, Hayek takes that approach.